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Moody's Has Bad News For Colleges

To the catalog of financial stresses on higher education—the imminent explosion in online learning, cutbacks in state aid and weak endowments—you can add one more: tapped-out parents.

Moody’s, which rates 515 colleges and universities for credit quality, puts a number on the problem in a report released Mar. 12. The average family that has set aside money for a four-year degree has only $12,000 today, down from $22,000 three years ago. In that time the cost of educating a student has climbed 10%. Result: The net tuition income that colleges have to get elsewhere (per student, over four years) has climbed from $59,000 to $77,000.

Those other sources of fuel for the higher education industry are, primarily, the current income of parents and students, borrowing by students and parents and government aid. None of these sources can now be counted on to keep up with rises in the cost of running a college. Students’ willingness to borrow seemed limitless a few years ago but is now tempered by awareness of how much recent grads are struggling with their loans.

Moody’s got its data partly from the latest Sallie Mae analysis of “How America Saves for College” and partly from its own research into collegiate financial statements. The report supplements a grim survey of higher education that Moody’s released in January. That report warned the education industry of weak family income, a declining contribution from state appropriations, the competitive threat from computerized education and “price sensitivity”—meaning, students are not so enamored as they once were of paying extra in order to attend a more glamorous school.

Price sensitivity by customers leads to price cuts by suppliers. Moody’s discovered that a third of colleges and universities aren’t keeping net tuition revenue up with inflation this year. “Net tuition” means the sticker price minus the discounts (“scholarships”).

The most prestigious colleges have both their brand names and their endowments to fall back on; if its back were to the wall, Harvard could cut back on law professors making $350,000 to teach one course. Second-tier institutions will be under financial strain.

Moody’s statistics display a sharp financial divergence between the most selective and the least selective private universities. The average Aaa-rated school admits 13% of applicants, matriculates half of those admitted, spends $75,000 per student and has $1 million of endowment and other financial assets per student. The average Baa school admits 67% of applicants, gets a fourth of those admitted to attend, spends $22,000 apiece on them and has only $24,000 of financial assets per student.

Among universities rated by Moody’s, the median credit quality is A1 for public institutions and A2 for private ones. So the financial strain in the education sector is unlikely to turn into tax-exempt bond defaults in the near term. But it might give pause to investors in the for-profit colleges that to a degree compete with the nonprofits that Moody’s is rating: Corinthian Colleges, DeVry and Apollo Group, among others.

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Yes, this is a bubble that investors have been talking about for years. It shouldn’t be a surprise. And something can be done about it. We need more consumer awareness, greater transparency, greater government oversight, and real legislative reform.

The 2012 Harkin Commission told us how bad the situation was, but nothing substantive has been done by Congress. In 2014, The US Department of Education will allow schools with a 39% student loan default rate to continue getting federal funds.

Currently, US taxpayers dole out tens of billions of dollars annually to proprietary institutions like University of Phoenix (Apollo Group) and Kaplan (Washington Post). Should taxpayers continue to prop up businesses that exploit students, workers, veterans, and taxpayers, when this money could be spent at community colleges for real-world vocational training and education?